• Wild and great.

What a:

1. wild day

2. great market to trade

Thanks for reading my diary today and enjoy your evening.

• I'm now 10% net short.

I am adding small to my SPY ($201.650) and QQQ ($101.60) short to move to 10% net short.

On the other side of the pew, nice move on (add on buy) Citigroup (C) from this morning and from new position Altisource Portfolio Solutions (ASPS) (+6% to +7% from purchase price of $48 from this morning).

And my energy investments -- Chevron (CVX), Devon Energy (DVN) and Exxon Mobil (XOM) -- are holding their gains.

• An Oldie but a Goodie.

At the request of my buddy/pal/friend  subscriber BadGolfer22 (see Comments Section) I am repeating an Oldie But a Goodie  --  "The Bone-Headed Federal Reserve" written back in early 2012:

* Every American citizen should be concerned about the Fed's lack of transparency and poor forecasting abilities.

Richmond Fed President Jeffrey Lacker was on "Squawk Box" this morning.

A year ago, Lacker was forecasting 2011 real GDP growth in the U.S. at 3.5%; it came in half that amount.

In the "Squawk" interview, Lacker admits that he and the other Fed members only recently realized that the structural headwinds (fiscal imbalances, structural unemployment, etc.) in the U.S. will limit and be a governor on domestic growth.

I find this mind-boggling and scary, as, with 150-plus economists on staff, this is not exactly confidence-building and exposes a serious and fundamental flaw in the Fed's forecasting and in the policy based on that errant forecasting.

As a result, it shouldn't be too surprising that many, in support of Ron Paul, are in favor of abolishing the Federal Reserve.

-- Doug Kass, "Recommended Viewing (Not!)"

On Wednesday, I wrote a critical note regarding the Fed's forecasting ability.

It's embarrassing for the Fed. You see an awareness that the housing market is starting to crumble, and you see a lack of awareness of the connection between the housing market and financial markets. It's also embarrassing for economics. My strong guess is that if we had a transcript of any other economist, there would be at least as much fodder.

-- Justin Wolfers, Economics Professor at the University of Pennsylvania

This morning, the Fed released transcripts from the mid-2000s (covered by bothThe Wall Street JournalandThe New York Times) that revealed an unflagging optimism and provided a profoundly unflattering view of Greenspan, Geithner, Bies, Warsh, Yellin, Bernanke et al. in their ability to foresee the economic collapse and debt crisis in 2007-2009.

Here are some examples of several wrong-footed quotes from some of the Fed's players during the 2006-2007 period, which was the end of the housing boom:

 "I think we are unlikely to see growth being derailed by the housing market."

-- Ben Bernanke, Federal Reserve Chairman

"It's fitting for Chairman Greenspan to leave office with the economy in such solid shape. The situation you're handing off to your successor is a lot like a tennis racquet with a gigantic sweet spot."

-- Janet Yellen, Vice Chairman of the Federal Reserve

"I'd like the record to show that I think you're pretty terrific, too (referring to Greenspan). And thinking in terms of probabilities, I think the risk that we decide in the future that you're even better than we think is higher than the alternative."

-- Timothy Geithner, Treasury Secretary (praising Greenspan in Greenspan's final Fed meeting)

"I would say that the capital markets are probably more profitable and more robust at this moment, or at least going into the six-week opportunity, than they have perhaps ever been."

-- Kevin Warsh, Former Federal Reserve Governor

The Fed's lack of transparency and poor forecasting abilities (at nearly every inflection point) should be a concern to every American citizen, as the Fed wields huge power in establishing monetary policy.

Perhaps too much power.

• It's up five basis points.

After initially rallying on the "patient" comment and continuing with "considerable time," the two-year note yield is up five basis points on the day to .60%, the highest of the week.

I'm guessing this is because the FOMC is looking past the current drop in headline inflation and inflation expectations while maintaining a positive view of the U.S. labor market as it lowered its unemployment rate forecasts at year-end 2015.

As Fed Chair Yellen said in her press conference that it won't likely raise rates in the next couple (likely means two) of meetings, maybe it will be April or June now if the labor market data continues to improve. However, if the labor market continues to improve, March is still possible as that would still be considerably after the October end of quantitative easing.

• Spyders are down $2 now from my earlier short - but an hour ago.

I write this not to gloat, but to emphasize that this is an ideal environment for opportunistic traders -- not so great for investors.

I would be reducing one's "VAR" into this ramp.

• About my bond short and the Fed.

Any thoughts on my bond short from subscribers after the Fed announcement?

Let's talk about it in the Comments Section.

• Here is how The Wall Street Journal's Jon Hilsenrath interprets the Fed's statements:

The Federal Reserve said it would be patient about raising short-term interest

rates in the coming year as it weighs a mix of conflicting signals about the

U.S. economy, retaining an assurance that a "considerable time" would pass

before rates start going up.

With the new interest-rate guidance the U.S. central bank is effectively

sticking to a plan to start raising short-term interest rates in 2015, but it

sought to soften the blow to the public by keeping a long-debated reference to

"considerable time."

The Fed "judges that it can be patient in beginning to normalize the stance of

monetary policy," officials said in a postmeeting statement. The officials

added the new description of their stance was "consistent" with past assurances

that rates would stay low for a "considerable time."

• I am back to 10% net short now.

• Peter Boockvar on forecasts by the Fed:

One last thing, here are the economic forecast changes for 2015 (why waste our time looking at 2016 forecasts) and based on the faster than expected drop in the unemployment rate, they continue to move the goal posts on the labor market figures as to when they may raise rates. The offset is lower than expected headline inflation as the core isn't much different.

GDP: 2015=2.6-3%, unchanged from October

Unemployment range 5.2-5.3% vs 5.4-5.6%

PCE inflation 1-1.6% (can drive a truck thru that) vs 1.6-1.9%

Core PCE 1.5-1.8% vs 1.6-1.9%, thus modest

• The Lindsey Group's Peter Boockvar parses the Fed announcment:

The FOMC statement again tried to thread a needle by maintaining the market's expectations of a 2015 hike but at the same time giving us no clue as to when. The FOMC didn't change much their inflation commentary and repeated that "longer term inflation expectations have remained stable." This is noteworthy in that they won't respond to the sharp drop in commodity prices. They also continued to acknowledge the improving labor market with wording that was also similar to the October meeting but didn't get amped up after the 300k+ print in November. Where the markets got all excited about is the "Committee judges that it can be patient in beginning to normalize the stance of monetary policy" comment but with a December 2015 fed funds futures contract priced at about .50%, this was priced in. Also, markets got excited when they repeated that rates will stay at 0-.25% for a "considerable time following the end of its asset purchase program in October, especially if projected inflation continues to run below the Committee's 2% longer run goal. However, they said if things progress faster than expected, rate hikes will come sooner. Thus, "considerable time" has been neutered AGAIN with this back and forth.

Bottom line, this statement was little changed with the October one and the only alteration of interest was the 'patient' comment. Everyone is excited by "considerable time" staying in but that's irrelevant because of the caveats around it. I honestly don't think anything new was told to us today as we know they'll be patient and we have no further clue as to when they'll raise rates. Richard Fisher dissented in that while he believes the Fed should be "patient" with the rate hikes, being at zero is no longer appropriate as the "improvement in the US economic performance since October has moved forward, further than the majority of the Committee envisions, the date when it will likely be appropriate to increase the fed funds rate." Plosser also dissented because he thought enough is enough with the considerable time commentary. Kocherlakota is obsessed with generating higher inflation and apparently doesn't like low oil prices because he seems afraid of the Fed missing their 2% inflation target. Let's be honest, the Fed is winging it and playing games of semantics doesn't do us any favors from a market perspective and certainly not from an economic one. Short rates don't belong at zero anymore and the Fed is struggling with when and how to change that at the same time not wanting to scare the markets and the global economy when markets and the global economy are currently on edge.

• QQQ and SPY.

My view is that today's 40-plus-handle reversal is borrowing (or taking away!) from the anticipated year-end rally I have been expecting.

Adding a QQQ short (at $101.62) to my SPY short.

Back at 5% to 10% short now.

• Bottom line on the Fed: They are clueless.

See my opening missive today.

• Slightly net short.

My tactical response to the Fed's announcement is that I reestablished a SPY short at $201.70 and I added to my controversial bond short (adding to TBT).

I am back slightly net short.

• Check it out.

Big rallies in iShares iBoxx $ High Yield Corporate Bond (HYG) and SPDR Barclays High Yield Bond ETF (JNK) today.

• Bill Ackman on Bloomberg TV.

Run, don't walk to watch Pershing Square's Bill Ackman on Bloomberg Television as he discusses new allegations with regard to his Herbalife (HLF) short.

He tells my pal Stephanie Ruhle that the "implosion" of Herbalife will likely happen in 2015 and the government is "closer" to intervening. He also said, "I think this will be a 2015 event -- the implosion of the company. I think worst case, early 2016. What gives me confidence is that the company has $1.150 billion of debt that comes due in early March 2016. They are not going to be able to refinance that credit facility. They do not have hard assets to provide security. The banks who provided that facility provided it before the government investigations and all the regulations."

Ackman went on to say in the interview that he's not spoken with Carl Icahn about Herbalife recently. He said, "Unfortunately, I think he's kind of stuck...I'd love to see him sell...I think he's a stuckholder."

Other highlights of Ackman's appearance:

-Former HLF distributors turning state's evidence

-Obtained key HLF video that Feds already have

-Video is of top HLF distributors speaking

-Has indemnified some HLF witness before they go to Fed

-Sees worse 4Q than 3Q from HLF

-'Implosion' of HLF will likely be 2015 event

-Added to Fannie-Freddie in last 2 weeks

-Fannie-Freddie more important today than 5 years ago

-Privatize Fannie-Freddie to protect U.S. taxpayers

-Pershing 'meaningfully' built Fannie-Freddie bet

-Zoetis investment 'too early to discuss'

-North American railroads need to boost efficiencies

Lets go to the tape! 

• From Sir Arthur Cashin:

Brent back near $62 raises hopes that bottoming process may be in play.

Stock bulls points to pullback hitting the 5% level. In every other dip this year (except October) the buy dippers came in at 5%.

Fed day upward bias adds to hope.

Run rate later.

• Crude is ramping (+$2.15) and is now +$3 from the day's lows.

• In Potash (POT) and Radian Group (RDN).

I am taking off some POT and RDN longs (though offering at slightly higher prices), but maintaining the stocks on my Best Ideas list.

• I pressed my Ocwen Financial (OCN), Citigroup (C) and Altisource Portfolio Solutions (ASPS) longs in the late afternoon.

• Concerning my short bond position.

Speaking of our Columnist Section debate on my short bond position, the yield on the 10-year U.S. note has just gone over 2.10%.

It was close to 2.00% at yesterday's low yield.

• Cooperman on CNBC.

Omega Advisors' Lee Cooperman will be on Fast Money Halftime today.

Listen for his pearls of wisdom.

• With today's adds, I am slightly net long.

As mentioned in today's opening missive, I suspect we might be on the cusp of some year-end strength now.

• Devon Energy (DVN), Exxon Mobil (XOM) and Chevron (CVX).

DVN, XOM and CVX are the "world's fair."

I'm holding on to my core investment positions in energy.

• Oil stocks will rally BEFORE the price of oil stabilizes and rises.

• A small long position.

I repurchased a small long position in Altisource Portfolio Solutions (ASPS) this morning ($48).

I think the hedge fund community, heavily weighted in the Ocwen (OCN) complex, might mark the group up in the days ahead.

I am placing ASPS back on my Best Ideas list.

• I have no positions (long or short) in stock ETFs at this point in time.

• I continue to add to Citigroup (C).

• I have added to Twitter (TWTR) and Ocwen Financial (OCN) longs this morning.

• Sweet decision on Twitter (TWTR).

This morning, a boutique, Pivotal Research, upgraded Twitter and raised the price target to $42:

"Recent weakness has been overdone we feel, however, although investor concerns such as the contrast between management optimism on product ubiquity and mgmt turnover along with the negative optics associated with stock sales are understandable. Most critically, rev growth should allay concerns around user trends, as the co's relationships with advertisers are strong and growing. Thus we remain comfortable focusing on the scale of the business at which time revenue growth begins to plateau."

I added to Twitter this week. 

• Dial Doug and let us know. We welcome your comments.

I would love some input from our subscribers on my short bond moves.

Thanks!

See you in the Comments Section!

• The Gospel According to Peter Boockvar.

There has been considerable discussion about whether 'considerable time' will be left or taken out of today's FOMC statement. I'm of the belief that it doesn't really matter and I say that by just listening again to what Janet Yellen said at her September press conference and what Fisher followed up by saying in November. She said then in an answer to a question, "I want to emphasize that there is no mechanical interpretation of what the term 'considerable time' means. And, as I've said repeatedly, the decisions that the Committee makes about what is the appropriate time to begin to raise its target for the federal funds rate will be data dependent. And in my opening comments, I again emphasized something I've said previously, which is that if the pace of progress in achieving our goals were to quicken, if it were to accelerate, it's likely that the Committee would begin raising its target for the federal funds rate sooner than is now anticipated and might raise at a faster pace. And the opposite is also true, if the projection were to change. So there is no fixed mechanical interpretation of a time period." Richard Fisher followed with this by saying in November that this wording "neutered the adjective 'considerable' in stating the time frame under which we might act." Getting rid of these two words will tell us nothing about when the first hike takes place as all it will do is give the FOMC flexibility on the timing.

Thus, focus more on which way the FOMC is leaning in terms of their dual mandate. Is there more of a focus on the much improved labor market in a variety of indicators and at the same time will they consider the decline in inflation and inflation expectations transitory due to the decline in commodity prices? This would obviously imply a sooner than expected rate hike. Or, while acknowledging the improving jobs picture, will they focus more on the inflation side (even though we're seeing good disinflation) and express concerns with global growth (where lower prices is a symptom) which of course would mean later hikes than expected.

I have one more point on the Fed. Outside of the possibility for the first rate hike in 2015 since 2006, what is also hugely important with respect to policy in light of the overseas goings on is this, IF and I emphasize IF, the US economy starts to get impacted negatively by the overseas weakness and the decline in oil prices reflects an incoming global downturn that will offset the benefits of lower energy prices, what ammunition does our Fed have to deal with it? Unfortunately they don't have anything other than symbolism. I say symbolism because another round of QE in light of $2.4T of bank reserves parked at the Fed will again do nothing for growth and would again just temporarily goose asset prices. The Fed's extreme desire for patience (6 years of zero rates), sole focus on short term economic gyrations (multiple QE rounds and Operation Twist) and fear of not repeating the premature tightening of 1937 has left the Fed with zero flexibility to deal with whatever negatively comes our way. This is qualitative exhaustion as my boss has termed.

In the context of the Fed today, the 8:30am CPI read will be key ex energy prices. The MBA said refi applications were flat w/o/w while purchases were down by 6.9% and falling to a 5 week low. The better labor market and further drop in mortgage rates still cannot drive any sustainable traction in the housing market. Lastly, Investors Intelligence said Bulls fell 2 pts to 49.5 but almost all of them went into the Correction camp as Bears were little changed at 14.9 from 14.8. Notwithstanding everything going on in the world currently with respect to growth prospects and extreme monetary policy, bears remain endangered.

Japanese exports in November rose by 4.9% y/o/y but that was below the estimate of up 7% and again it was all yen weakness as volume growth fell 1.7% and exports were down to all 4 major regions, the US, EU, Asia and China. Helped only in part to lower energy prices, imports fell 1.7% vs the estimate of up 1.6%. Debasing ones way to prosperity doesn't have a long history of success.

The UK unemployment rate for the 3 months ended October held steady at 6% and wage growth continued to improve. Wages with bonus and without were both above the estimates with the former up by 1.6% y/o/y, the best since October '12 and above the November CPI print of 1%. Thus, finally some REAL wage growth in the UK after years of declines.

• Peter Boockvar parses through the price data.

Headline CPI for November fell .3% m/o/m, two tenths more than expected but the core rate was right in line up by .1%. The y/o/y gains are 1.3% and 1.7% for both. The headline figure was of course driven by energy prices which fell by 3.8% m/o/m and 4.8% y/o/y but services inflation ex energy continues its upward march and is why core inflation remains in the 1.5-2% range. This component was up by .2% m/o/m and 2.5% y/o/y again driven by rent. Rent of primary residence rose .3% m/o/m and is now up 3.5% y/o/y, above income growth for many. Food prices were up by .2% m/o/m and 3.2% y/o/y. Thus, much of the savings at the gas pump is going to pay for the higher supermarket bill. Keeping a lid on inflation, on top of energy, were price declines for apparel and new and used cars. Airline prices rose by 1.4% m/o/m. Medical care costs rose by .4% m/o/m and 2.5% y/o/y. Bottom line, consumers are certainly getting a big relief from the drop in gasoline prices but we can't look at that in a vacuum. Higher services inflation is keeping a bid to core inflation. Let's take rent for a minute for the 35% of households that do so. Average rent is about $1000 per month, thus 3.5% annual increases come to $420 per year which is only slightly below the annual gasoline savings that consumers will now potentially see. I give these examples not to downplay the benefit to consumers from lower gasoline prices, which is well needed for low income earners, but just to put overall price changes in perspective and that the cost of living is driven by a variety of things.

• The investment mosaic is becoming more complicated -- and not for the better.

"She would never say where she came from

Yesterday don't matter if it's gone

While the sun is bright

Or in the darkest night

No one knows, she comes and goes

Goodbye Ruby Tuesday

Who could hang a name on you?

When you change with every new day

Still I'm gonna miss you!"

--The Rolling Stones, "Ruby Tuesday" 

Yesterday and during recent weeks I have emphasized that malinvestment (reaching for yield behavior without recognition of risk) sow the seeds for a business downturn,that numerous fundamental issues have multiplied and technical divergences have been amplified, correlations have broken down, that the world is flat and networked and that the notion that the U.S. will thrive as an "oasis of prosperity" in a world of geopolitical and global uncertainty is wrong-footed, and there's a developing adverse shift in liquidity (and rise in dislocations) in some markets and that history rhymes.

In the above backdrop, adverse credit events become more commonplace, particularly relative to the salad days in the markets since the Generational Bottom in March 2009. 

These factors and others -- especially after such a large ramp in valuations in 2013 (when the S&P advanced by 31% even though earnings rose by only 8%) and given the sharp rise in equity markets since mid-October -- will likely contribute to a volatile and potentially weaker setting for the world's stock markets.

"Fear tends to manifest itself much more quickly than greed, so volatile markets tend to be on the downside. In up markets, volatility tends to gradually decline."

-- Philip Roth

Yesterday's wild ride, in which the S&P Index traveled by 100 points (up and down) and this morning's 16 handle lift in S&P futures is likely a picture of what lies ahead in the markets for 2015. To this observer, violent moves like on Tuesday are not providing terra firma for either the markets or for market participants' sentiment

"I don't enjoy any kind of danger or volatility. I don't have that kind of 'I love the bad guys' thing. No, no thank you. I like nice people."

-- Tina Fey

As a result, I have counseled that most investors should err on the side of conservatism by reducing their portfolio's "value at risk."

One thing I feel we have lost that we have had in the past five years of our investment life is a sense of (economic and social) progress -- that things are getting better. I believe there will (in 2015-16) be a sense of volatility, but not of fundamental progress. So, though I am currently in a market neutral position based on the expectation of some near term seasonal strength, I remain cautious regarding the market's prospects in 2015.

"Fragility is the quality of things that are vulnerable to volatility."

-- Nassim Nicholas Taleb

As I have written, by definition, fragile and sub-par global economic growth exposes itself to exogenous shocks.

And, as I wrote yesterday, the recent economic chaos in Russia is likely to exacerbate my claims and concerns above. I don't see that chaos changing much in the months ahead and Russia is likely going to even heighten market volatility.

"The next likely move is the imposition of capital controls in Russia, but history generally shows that this is typically a desperate policy measure by countries where the currency is under attack. Capital controls have a mixed record of effectiveness as usually outflows of capital quickly resume after their imposition.

A larger question is whether non-Russian companies will be allowed to repatriate profits. If they are not (and rule of law is terminated), this could be even more destabilizing over time to the Russian economy.

Finally, over the past few weeks I have warned of contagion and its long tail.

In a flat and networked world, even a supposedly minor currency can set off a contagion that can rock markets and lead to a financial crisis.

Today markets are more coupled or networked than they were in 1998 when Russia collapsed for the first time.

So, as it relates to Russia, there will be no "Goodbye Ruby Tuesday," as Russia's destabilized and suffering economy won'tchange with every new day."

-- Kass Diary, December 16, 2014

I have also cautioned that favorable comparisons made between today and to when Russia defaulted in 1998 are misplaced because unprecedented monetary policy has put the U.S. in a corner -- with little options and/or room for error: 

"Back when Russia defaulted, theFederal Reservecould ease and Fannie and Freddie could channel the money into the mortgage market and set off a housing boom and refinancing spree -- plus a dot-com bubble.

And then we could party when it was 1999.

Today, and over the last six years, the party might be over because we have feasted on borrowed money and we are living on borrowed time. The margin of error has been compressed (and options have been exhausted) with global rates at or near zero. 

Unfortunately, as I have previously written, monetary policy has put the cart of asset prices before the horse of enterprise, as policymakers have entertained the fantasy that high asset prices made for prosperity rather than the other way around."

 - Kass Diary, December 16, 2014

Bottom Line

In summary and from my perch, 2015 will be a year for investors to be focused on return of capital and not on the return on capital. 

The investment mosaic is becoming more complicated -- and not for the better.

• 15% of my portfolio.

As most recall, my biggesst surprise in my 2014 Surprises was that bonds would outperform stocks and that interest rates would FALL and not rise. (A rate rise in 2014 was the conventional view held by every single  strategist and economist on the sell side). 

Yesterday, I materially expanded my short bond position further. It now represents a large 15% of my portfolio.

To me, the best hedge for a resumption of better-than-expected economic growth in 2015 is not found in the equity market, it's in a short bond position in light of the outsized drop in yields (100 basis points lower in the 10-year U.S. note yield year over year) and the 30 basis point decline in the yield over the last few weeks.

Should many of my contagion fears be unfounded or overblown (see today's opening missive), there is little question that the $50 decline in the price of crude oil will be economically stimulative (on a global basis).

The reward vs. risk (or upside/downside ratio) has become quite favorable for a short U.S. bond position, both on a near-term basis and on an intermediate-term basis.

The 10-year note yields 2.05%.

Over the near term (next month or so) the downside may be 2.00% yield and the upside may be 2.25%.

Over the intermediate term (next three to six months) the downside may be 1.90% and the upside could be 2.50% to 2.75%.

Finally, at some point in 2015, it seems inevitable that yields on European and other sovereign debt will rise, perhaps dramatically, as that is where the real bubble/speculation resides.

If so, the multi-year gravitational pull of lower yields outside of the U.S. will fade in influence over here.